What is an Asset Management Company (AMC)?
An Asset Management Company (AMC) is an organization registered with SEBI, which takes investment decisions and manages the assets of mutual funds. The AMC is accountable for managing the investments of various schemes controlled by the mutual fund. The Trust oversees the performance of the AMC. The AMC employs professionals to manage the funds and may be assisted by a custodian and a registrar. AMCs are required to make investments in conformity with SEBI regulations.
What does a mutual fund do with your money?
A mutual fund invests the pool of money collected from investors in a variety of securities. This portfolio consists of stocks, bonds, money market instruments or a combination of these. The returns earned by the scheme, are shared by the investors on an equal basis, proportionately to the amount they've invested.
There are a wide range of mutual fund schemes that cater to customized investment requirements. Investors can buy units of a fund that suits their investment objectives and future needs.
Are mutual funds a safe investment option?
Mutual funds do not provide any guarantee of returns or capital. Also, different funds have a different risk profile which is stated in the objective of the scheme. Mutual funds invest in an array of securities like stocks, bonds, money market instruments etc. The value of these investments can fluctuate depending on the circumstances prevailing in the market thereby influencing the NAV. But as the risk is spread among a large group of people you individually take on low risk through diversification and collect high returns. In addition, mutual funds are managed by expert fund managers; they are always safer than direct investments in stock markets. Beside mutual funds are well regulated by SEBI ensuring sufficient transparency and professional management for the investors
What are the different options / facility that a mutual fund offers?
In order to cater to a range of investor needs, mutual funds offer various options, including:
Under growth option, dividends are not paid out to the unit holders. Income continues to remain invested in the scheme and is reflected in the NAV of units. Investors can realize capital appreciation through an increase in NAV of their units by redeeming them.
Dividend Payout Option
Under dividend payout option, dividends are paid out to the unit holders. However, the NAV of the unit falls to the extent of the dividend paid out.
Dividend Reinvestment Option
The dividends that accrue on funds are re-invested back into the fund and the investor is issued additional units proportional to the dividend amount.
Dividend Sweep Option
The dividends that are paid on funds are sweeped/invested in another Fund and the investor is issued units of the other fund in which the dividend is invested.
Systematic Investment Plan (SIP)
A Systematic Investment Plan is a feature specifically designed for those who are interested in building wealth over a long-term and plan a better future for themselves and their family. Anyone can enroll for this facility by starting an account with a minimum investment amount and giving post-dated cheques or ECS of periodic investment based on their convenience.
Systematic Withdrawal Plan (SWP)
A Systematic Withdrawal Plan allows investors to withdraw a pre-determined amount / units from the fund at a pre-determined interval. The investor''s units can be redeemed at the applicable NAV as on that day.
Systematic Transfer Plan (STP)
A Systematic Transfer Plan allows investors to transfer a pre-determined amount / units from the fund at a pre-determined interval to other fund. The investor''s units are redeemed from the fund and invested in other fund at the applicable NAV as on that day.
What is a portfolio?
A portfolio is a collection of investments such as stocks, bonds, cash etc. It is basically designed taking into consideration an investor’s time horizon, risk appetite and investment objective. A portfolio comprises of two or more investments which are not correspondingly affected by various risk factors. If the price of a particular asset falls due to the influence of a risk, the price of another asset may rise reducing the impact on the total investment. The risk on a portfolio is thus generally lower than the risk on a single investment.
What is Exit Load ?
Exit load is charged when an investor redeems his units or exits from the scheme (or transfers an investment between schemes) within the stipulated exit load period. The exit load is deducted from the redemption proceeds to an outgoing investor.
How do I invest in a mutual fund scheme?
Investors can contact the agents and distributors of mutual funds or visit Investor Service Centres of Mutual Funds (click here for address and contact details) for essential information and application forms. Forms can be deposited with mutual funds through the agents and distributors who provide such services or at any of Official Points of Acceptance of Transactions. At present, the post offices and banks also distribute the units of mutual funds.
Investors should not be influenced by commissions/gifts offered by agents/distributors for investing in a particular scheme. On the other hand they must consider the background of the mutual fund and accordingly make investment decisions.
How are mutual funds regulated?
The process of setting up a mutual fund is initiated by a sponsor. The sponsor creates a Trust (the fund) under the Indian Trust Act. The Trust then appoints an Asset Management Company (AMC). The trustees are responsible for safeguarding the interests of the investors in the mutual fund by ensuring that the operations of the fund conform to the relevant regulations. The fund also has to be approved by the market regulator, which is the Securities and Exchange Board of India (SEBI).
What is the role of a fund manager?
Fund managers are in charge of executing a consistent investment strategy which is in line with the pre-defined goals and objectives of the fund. Fund managers continuously keep track of market and economic movements and evaluate their portfolio & other securities in order to make informed investment decisions.
What should an investor look for in an offer document
(Scheme Information Document & Statement of Additional Information)?
Mutual funds are required to provide an abridged version of the offer document to investors; this report contains useful information. The application form for subscribing to schemes is an essential part of the offer document. SEBI has approved minimum disclosures in the offer document. An investor should look into the following carefully before investing in a mutual fund:-
- Scheme’s main features
- Risk factors
- Initial issue expenses and recurring expenses
- Exit loads
- Sponsor’s track record
- Performance of other schemes launched by the fund
- Qualifications and experience of key personnel including fund managers
- Pending litigations and penalties imposed etc.
What is purchase price?
Purchase price is the price paid by a customer to purchase a unit of the fund. The asked or offering price means the current net asset value per unit.
What is redemption price?
The price at which a mutual fund's units are redeemed (bought back) by the fund. If the fund does not levy an exit load, the redemption price will be same as the NAV. The redemption price will be lower than the NAV in case the fund levies an exit load and the redemption is done within the exit load applicability period.
Is there any difference between issue of a mutual fund (NFO) and an initial public offering (IPO) of a company?
There is a difference between NFO and IPO. IPOs of companies may open at lower or higher price than the issue price depending on market outlook and perception of investors. However, in the case of mutual funds, the par value of the units may not rise or fall immediately after allotment. An important difference between the two is how the NAV and stock price is calculated. The NAV of a fund is calculated by finding out the value of the investments in the portfolio. The stock price, however, basically reveals the market opinion about the stock and may discount the future growth of the company.
Who is a custodian?
A Custodian is an independent agency that is responsible for the possession, handling and safekeeping of all the securities purchased by the mutual fund.
The Custodian ensures that:
- Securities are maintained systematically
- Transactions are carried out accurately
- Dividends, interest and redemption proceeds are accumulated on the due date
- Benefits such as bonus or rights are accrued